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Malta

Archives

1) REFERENCES

Commission Report [COM(1999) 69 final - Not published in the Official Journal]Commission Report [COM(1999) 508 final - Not published in the Official Journal]Commission Report [COM(2000)708 final - Not published in the Official Journal]Commission Report [COM(2000) 708 final - Not published in the Official Journal]Commission Report [COM(2001) 700 final - SEC(2001) 1751 - Not published in the Official Journal]Commission Report [COM(2002) 700 final - SEC(2002) 1407 - Not published in the Official Journal]Commission Report [COM(2003) 675 final - SEC(2003) 1206 - Not published in the Official Journal]Treaty of Accession to the European Union [Official Journal L 236 of 23.09.2003]

2) SUMMARY

The October 1999 Report found that Malta had made little progress in its preparations for Economic and Monetary Union (EMU).

In its November 2000 Report the Commission felt that Malta had made progress in adopting the acquis, particularly as regards the financing of the government deficit by the Central Bank.

The November 2001 Report failed to record any specific progress on the adoption of the acquis in relation to EMU.

In its November 2002 Report the Commission felt that Malta had made progress in adopting the acquis in relation to EMU, particularly in the areas of banning direct financing of the government deficit by the central bank and the independence of the central bank.

In its November 2003 Report, the Commission notes that Malta is meeting the commitments and requirements arising from the accession negotiations and that it will be able to implement the acquis as from the date of accession.The Treaty of Accession was signed on 16 April 2003 and accession took place on 1 May 2004.

COMMUNITY ACQUIS

The third stage of EMU began on 1 January 1999. That date entailed far-reaching changes for all Member States, even those not taking part in the euro area from the outset.

In the economic sphere, the keystone is the coordination of national policies (national convergence programmes, general economic guidelines, multilateral surveillance and excessive-deficit procedure). All countries are required to comply with the stability and growth pact, to refrain from direct financing of the government deficit by the central bank, to prohibit privileged access by public authorities to financial institutions and to have liberalised capital movements.

Member States not taking part in the euro area conduct an independent monetary policy and participate in the European System of Central Banks (ESCB) under certain conditions. Central banks must be independent and must have price stability as their primary objective. Lastly, exchange-rate policy is regarded as a matter of common interest by all Member States, who must be in a position to participate in the new exchange-rate mechanism.

Even though accession entails acceptance of the objective of EMU, compliance with the convergence criteria is not a precondition. However, since those criteria are indicative of a macroeconomic policy geared to achieving stability, all Member States must, in due course, comply with them on a permanent basis.

EVALUATION

In the update of its Opinion on Malta's application for EU membership, adopted in February 1999, the Commission concluded: "Malta will need to build up a track record in the establishment of a stable and sound macroeconomic environment and implementation of reform and liberalisation." In 1999 the European Union was still the country's main export market, absorbing over 50% of Malta's total exports. The 2001 report considers that Malta has caught up compared with the EU average, since the per capita gross domestic product (GDP) was 53%. The role of the private sector in the economy has grown slightly since 1997 and it has shown dynamism in creating jobs, but the public sector still accounts for a large share of total employment. Malta is a very open economy that is well integrated in terms of trade with the European Union.

As regards economic activity, the real GDP growth rate was slightly more than 4% in 1998 and reached 4.2% in 1999. Real GDP expanded by 5% in 2000, driven primarily by strong domestic demand. After this strong performance in 2000, the Maltese economy slowed down in the first half of 2001 and fell by 0.8% over the year as a whole, largely because of the deterioration of the international economic situation. GDP expanded by an average of 3.4% in real terms over the period 1997-2000. The 2003 report notes that economic activity has remained weak as a result of low external demand and the downturn in the tourism sector. GDP growth resumed in 2002 at a rate of 1.2%. In the first quarter of 2003 GDP fell by 1.9% year on year.

The situation of public financing has been problematic throughout the study period. The budget deficit rose to 11% of GDP in 1998 compared with only 4% in 1995. The government has undertaken to reduce the public deficit to 4% of GDP by 2004. The deficit was successfully reduced to 7.8% in 1999 and 7% in 2000. The reduction of the deficit was the result of increasing revenues and lower growth of expenditure. In October 2001, the government submitted to the European Commission the first Maltese "Pre-accession Economic Programme" (PEP), which is part of the Pre-accession Fiscal Surveillance Procedure launched by the EU Commission. The decreasing trend of the government deficit was interrupted in 2001. Over the entire period, the government deficit fell from 10.7% in 1997 to 7% in 2000. The gross debt ratio, rising steadily since 1999, had reached almost 66% of GDP in 2001 compared with 56.1% in 1998. The 2003 report notes that the public deficit decreased slightly to 6.2% of GDP in 2002 from 6.8% in 2001. The mounting level of government debt, which reached 66.6% of GDP at the end of 2002, led to significantly higher interest payments.

The rate of inflation fell to 2.4% in 1998 and remained at the fairly low level of 2.1% in 1999. In 2000 average inflation increased slightly to 2.4%. Several taxation changes and fiscal measures drove it up to 2.5% in 2001. The 2002 report notes that, on average, inflation has remained fairly low. It was kept artificially low partly by price controls. At the end of 2001, however, prices took off again, mostly led by higher food prices. The twelve-month average rate of inflation decelerated to 2.2% in 2002.

On the exchange rate, since 1989 the Maltese lira has been pegged to a basket of three currencies: the ecu, the pound sterling and the US dollar. On 1 January 1999 adjustments were made to this pegging to take account of the introduction of the euro. The central bank's main objective is maintaining exchange rate stability. Between March 1999 and March 2000, the Maltese lira rose by 5.7% against the euro. On 23 August 2002 the monetary authorities altered the weighting of the various currencies making up the "basket" of the Maltese lira. The present weightings are 70% for the euro, 20% for the pound sterling and 10% for the US dollar. The 2003 report notes that the Maltese lira has depreciated against the euro. This has had only a limited impact on import prices.

Weakening domestic demand has led to a reduction of the current account deficit compared with the earlier very high levels. Although the current account deficit improved during 1999, down to 3.5% of GDP from 5.6% in 1998, it widened during the first quarter of 2000, reaching 14.8% of GDP. The 2002 report considers that the current account deficit remains high. According to the 2003 report, it decreased slightly to 3.9% of GDP in 2002.

On the question of structural reforms, the government has adopted a timetable for the dismantling of the levy system. The programme also envisages structural reforms of public expenditure, the introduction of privatisation and the restructuring of the public sector. The government is undertaking a number of important structural reforms. At the end of 1999, an industrial restructuring programme was launched, including measures to remove protective instruments for Maltese industry. The liberalisation of trade was an essential element of economic policy, although some sectors still retain a high degree of protection. State aids are still high in several sectors. In 2000 a number of important structural reforms were gradually introduced. Trade liberalisation continued with the removal of import levies. The government progressively reduced its weight in the economy although the privatisation of several public enterprises has been delayed. A proposal for a pension reform was expected in 2001, but no agreement has been reached so far. The increasingly liberalised macroeconomic environment raises new challenges for the policy mix. The 2003 report takes the view that progress on structural reforms has been mixed. The privatisation process continued in 2002 with a sale of shares of Maltapost and Malta International Airport. However, the long-awaited pension reform continues to be delayed

On the independence of the central bank, the 1999 report noted that the Central Bank of Malta was not fully independent of the government since the Minister of Finance may still, in exceptional circumstances, give directions to the Central Bank on the conduct of monetary policy. Moreover, Malta was not complying with the Treaty on the issue of direct financing of the public sector by the Central Bank. A year later the island ended the Central Bank's possibility for direct financing of the public sector, which marked significant progress in the adoption of the acquis. No other progress has been made towards ensuring the independence of the Central Bank. The 2001 report notes that plans have been drawn up to bring the law on the Central Bank of Malta into line with the acquis but that the Parliament had not yet approved them. The 2002 evaluation states that progress has been recorded in the areas of prohibition of direct public sector financing by the Central Bank and of independence of the Central Bank. The new Central Bank of Malta Act was approved by the Parliament in July 2002. Price stability is now the primary objective of the Central Bank and all lending to the government is banned; however, the conformity of this amended law with the acquis remains to be confirmed. Maltese legislation therefore seems to be largely in conformity with the acquis in this chapter and its administrative capacity is generally adequate. The 2003 report notes that alignment with the acquis is complete.

Negotiations on this chapter were closed in December 2002. Malta has not requested any transitional arrangements. Malta is generally meeting the commitments it made in the accession negotiations.

This summary is for information only and is not designed to interpret or replace the reference document.